Archive for the ‘Financial Planning’ Category

According to the IRS, the average tax refund this year so far is around $2,000, about a 2% increase over last year. I often hear people asking one another “how much was your refund this year” and most people proudly respond by stating the dollar amount of their refund. I cringe when I hear this conversation. They don’t realize that they have provided our federal government with an interest free loan. The IRS will not do this for you! But, more importantly, they overpaid their income taxes by approximately $170 per month, primarily through excessive payroll withholding, or quarterly estimated payments, resulting in significantly less cash flow. These amounts should have been directed into some appropriate type of savings vehicle or paid down credit card debt.

Most people do not discuss the amount of their total tax liability (the amount of tax based on your taxable income before any payroll withholding or quarterly estimated payments) but discuss the amount of their refund or how much they owed. To a great degree, you control the size of your tax bill every April 15. Strategic tax planning throughout the year can decrease your tax liability. Also, if you consistently receive large tax refunds from year to year, decrease your withholding exemptions (ask your employer for Form W-4) or decrease quarterly estimated tax payments.

If you are self-employed, or are operating a side business in your spare time, you have special tax problems and tax opportunities.

Retirement Plans: You may be able to shelter all, or a portion, of your self-employment income even if you are covered by a plan through your employer.

Estimated Tax Payments: If you have self-employment taxable income you may have to make estimated tax payments throughout the year or incur an underpayment penalty. For 2007, one way of accomplishing this, would be to pay in 100% of your 2006 tax liability, or 110% of your 2006 tax liability if you had adjusted gross income in excess of $150,000. The other way is to pay in 90% of the 2007 tax liability.

Health Insurance Premiums: You may be able to deduct 100% of your premiums paid in 2007 as an adjustment to income on your Form 1040. The only limitations are (1) the amount can’t exceed your net earnings from your business, and (2) you can’t have been eligible to participate in a subsidized health plan of your employer or your spouse’s employer.

Home Office: If you use your home to conduct your business, a percentage of the ongoing expenses, including depreciation, may be deductible. The percentage is based on the square footage used for the office in relation to the entire home.

Employ your Children: This technique allows you to shift income to your lower-bracketed children and to get work done in the process. Earned income is not subject to the so-called “kiddie” tax. This only works if the work is legitimately performed and the amount of the compensation is reasonable.

Asset allocation is your target mix of stocks, bonds, and cash. Without periodic monitoring, your allocations may stray considerably from your target allocation.

For you to maintain your asset allocation and risk-control strategies, you should:

• Check your asset class weightings semi-annually, or minimally annually.

• Rebalance whenever any asset class has strayed more than 5% from your target allocation.

• Time your rebalancing to coincide with a memorable date, such as a birthday or an anniversary.

It is best to rebalance tax-deferred accounts (401(k) or IRAs) first, since there are no tax consequences. Also, you should determine the amount of any related transaction costs.

By now you should have received your stockbroker’s Form 1099-B. This form is also sent to the IRS and indicates the dollar value of the stock you sold last year. We use this as the minimum amount that is reported on your Form 1040. Any amount less, may generate an IRS Notice. Depending on the broker, the information contained with the 1099-B may be all we need to prepare your tax return. Many brokers are now including not only the proceeds from the sale of stock, but also the basis (cost of your stock) in the stock sold. Unfortunately, they do not always include the basis. As a result, you need to provide us with the information. When you provide your basis, it makes our job easier and less expensive for you. Here are some rules in determining your basis:

• With regard to mutual fund shares, the most common method in determining basis in your shares is the “average cost” method. This means you take the cost of all your shares purchased, including dividend reinvestments, and divide the total by the number of shares on the date of sale. The result is the average cost of shares (your basis). Alternatively, you can use the double-category method, whereby you total the cost of shares held more than one year and total the cost of shares held one year or less. You then figure the average cost per share for each group.
• Under the specific identification method, you specify which shares have been sold. Your basis is what you paid for those shares when you acquired them. In order to use this method you must give written notification to the fund as to which shares you are selling
• If you do not specify a method for calculating basis, the IRS assumes that you use the FIFO method, where the shares sold are the ones you have held the longest, which usually results in the largest capital gain.
• With regard to individual stocks, you may also use the specific identification method and you also must give written notification to your broker to identify the shares that you are selling.
• As with mutual fund shares, if you do not identify the shares sold, the IRS assumes that you use the FIFO method.

These are just a few of the complex rules with regard to purchasing and selling securities. If you have any questions, please call.

If you refinanced, or are considering refinancing, your home mortgage this year, you may be able to deduct some of the refinancing expenses on your tax return.

Points

So-called “points” may be deductible as mortgage interest. Points paid to obtain an original mortgage on the acquisition of your personal residence are fully deductible in the year paid. Points incurred to refinance a home mortgage must be amortized over the life of the mortgage. If you used the loan proceeds to pay for improvements on your residence, and if you meet certain other requirements, the points incurred will be fully deductible in the year paid. If you are refinancing the mortgage on your personal residence for a second time, the unamortized portion of the points paid on the first refinancing will be fully deductible.

IRS Definition of Points

Points, in order to qualify as deducible interest, must be considered compensation to the lender solely for the use or forbearance of money. Points cannot be a form of service charge or payment for specific services. They must be calculated as a percentage of the loan amount, paid by you directly, and may not be derived from loan proceeds.

Related Expenses

Other related expenses, such as appraisal fees, notary fees, note preparation costs, etc., cannot be deducted.

A study of 17,000 stock mutual fund share classes by Standard & Poor’s, determined that fund expenses are a critical factor in fund performance.

The study found that over a ten-year period, stock funds with lower than average expense ratios performed better than funds with higher than average expense ratios in all investment style categories except one. The exception was the mid-cap blend category.

It is important for you to keep fund expenses in the forefront of your analysis when selecting funds for your portfolio.